Bankruptcy lawyers are frequently asked whether student loans are dischargeable in bankruptcy. The answer we tell folks is: “not likely.” In general, student loans are not dischargeable absent very special circumstances, such as a newly arising disability, or extreme undue hardship. Absent these circumstances, student loans will not be discharged.
The legal test for determining whether student loans are dischargeable is whether making the payments would impose an “undue hardship” on the debtor and his or her dependents. Generally, there is a three-part test for determining whether “undue hardship” exists. (See, e.g., In re Brunner 831 F.2d 395 (2d Cir. 1987)). In most cases, a debtor has the burden to prove: (1) that if the loan is not discharged he or she cannot maintain, based on current income and expense, a minimal standard of living for the debtor and his or her dependents; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for significant portion of loan repayment period; and (3) that he or she has made a good faith effort to repay the loans. Courts occasionally inquire into the Debtor’s good faith in minimizing current living expenses and maximizing personal and professional resources. The burden to prove undue hardship rests on the debtor. For the most part, however, courts focus on whether the “additional circumstances” in Part (2) are present.
“Additional circumstances” are exceedingly rare. Almost every reported case holds that the debtor’s loans cannot be discharged. In a recent case, a couple with over $270,000 in student loans could only discharge $65,000 based on one of the debtor’s bipolar disorder. The debtors were stuck with the rest. (In re Nixon, 453 B.R. 311 (Bankr. S.D. Ohio 2011) (using the Brunner test)). Therefore, most student loans are not dischargeable in bankruptcy.
On the other hand, if the debtor suffers from a serious disability, the debtor may expect that a bankruptcy court will discharge the student loans. Disabilities that have been sufficient to discharge student loans include chronic fatigue syndrome, chronic pain, crippling arthritis, and emotional disorders. Please see your local bankruptcy attorney to determine where the law stands in your jurisdiction.